Tue Aug 23rd, 2016 at 02:45:51 PM EST
Joseph Stiglitz just published an interesting analysis of Europe's economic and political situation: Reform or Divorce in Europe.
He points to four kinds of explanations for the current dire situation Europe is facing:
Frontpaged with minor edit - Frank Schnittger
- blame the victim (public debt, welfare state and labour-market protections)
- bad leaders and policies (insufficent economic skills, austerity, structural reforms...)
- blame European bureaucracy and regulations
- an ill-designed euro
Stiglitz kind of dismisses the first three explanations, except the second one, although he thinks that:
Most important, given the available tools, not even the most brilliant economic czar could not have made the eurozone prosper.
Therefore, he focuses on the fourth one:
That leaves the fourth explanation: the euro is more to blame than the policies and structures of individual countries. The euro was flawed at birth. Even the best policymakers the world has ever seen could not have made it work. The eurozone's structure imposed the kind of rigidity associated with the gold standard. The single currency took away its members' most important mechanism for adjustment - the exchange rate - and the eurozone circumscribed monetary and fiscal policy.
This system cannot and will not work in the long run: democratic politics ensures its failure.
the current halfway house is untenable. A system intended to promote prosperity and further integration has been having just the opposite effect.
But, instead of suggesting to get rid of the Euro, he proposes a set of solutions:
Only by changing the eurozone's rules and institutions can the euro be made to work. This will require seven changes:
· abandoning the convergence criteria, which require deficits to be less than 3% of GDP;
· replacing austerity with a growth strategy, supported by a solidarity fund for stabilization;
· dismantling a crisis-prone system whereby countries must borrow in a currency not under their control, and relying instead on Eurobonds or some similar mechanism;
· better burden-sharing during adjustment, with countries running current -account surpluses committing to raise wages and increase fiscal spending, thereby ensuring that their prices increase faster than those in the countries with current-account deficits;
· changing the mandate of the European Central Bank, which focuses only on inflation, unlike the US Federal Reserve, which takes into account employment, growth, and stability as well;
· establishing common deposit insurance, which would prevent money from fleeing poorly performing countries, and other elements of a "banking union";
· and encouraging, rather than forbidding, industrial policies designed to ensure that the eurozone's laggards can catch up with its leaders.
An amicable divorce would be better than the current stalemate.
Of course, every divorce is costly; but muddling through would be even more costly. As we've already seen this summer in the United Kingdom, if European leaders can't or won't make the hard decisions, European voters will make the decisions for them - and the leaders may not be happy with the results.
Although I think he tends - probably for the sake of his reasoning - to underestimate the role of leaders and the entanglement between ideology, policies and tools; It is nevetheless an intresting set of measures. Indeed, most, if not all, of them go clearly against austerity policies and adopt major changes to the current treaties. For example, abandoning the convergence criteria means abrogation of the TSCG treaty (which, by the way aims at imposing budget deficits lower than 0.5% of GDP, a.k.a. the "gold rule").
He does not develop the growth strategy issue and the ways the EU should help to reduce the differential of productivity between "laggards" and "leaders". This would require a major European investment plan orders of magnitude bigger than the ridiculously poor Plan Juncker.
However, Stiglitz acknowledges that the political situation is not favorable:
but today's eurozone leadership may lack the political will to carry them out.
So, implementing these measures requires significant changes in the EU institutions and in the political landscape, starting with more transparency in the EU institutions decision-making and more accountability towards the European citizens.